Where North Korea's elite go for banned luxury goods

07/17/2017 - 07:07

You can buy anything your heart desires in this North Korean store: premium blended whisky, jewelry and perfume. Or you can pick up a brand new drum set or a saxophone that's carefully displayed in a glass case.

Seoul, South Korea (CNN)You can buy anything your heart desires in this North Korean store: premium blended whisky, jewelry and perfume. Or you can pick up a brand new drum set or a saxophone that's carefully displayed in a glass case.

But there's a catch.

The department store is cash only. And the profits could go to an illegal nuclear weapons program.

New images released as part of a yearlong investigation by NK Pro, an independent North Korea monitoring group, shows just what money can buy in two luxury Pyongyang department stores.

Luxury goods can be seen on sale at one North Korean store in this photo supplied by NK Pro/NK News.

In much of the countryside, humanitarian groups say North Koreans live in grinding poverty. But in the capital, there is clearly money to spend.

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"I saw North Koreans paying with hundred dollar notes for items costing more than $2,000," said a senior Western diplomat who was based in Pyongyang and visited the stores several years ago.

Anybody with hard US currency was allowed to shop there, he said.

Banned by sanctions, still getting in

The world is accustomed to trying to keep goods out of North Korea.

Missile technology and military hardware have long been barred by United Nations sanctions.

But faced with the regime's steady march towards nuclear armament, the UN Security Council has added luxury imports like racing cars, pearls, sports goods, and expensive watches to the sanctions list.

If they wanted to punish the ruling elite, it doesn't appear to be working. Several items for sale in the NK Pro photos appear to be banned.

There is a whole shelf dedicated to products from Montblanc, the German luxury brand, including a watch with a price tag of more than $4,000 -- at official conversion rates.

In this photo supplied by NK Pro/NK News, a Montblanc watch can be seen with a price tag of 460,000 KPW -- more than $4,000, according to official exchange rates in July 2017.

Richemont, the company that owns the Montblanc brand, told CNN that it does not trade in sanctioned countries or sell in North Korea.

"The imports you are referring to could be linked to unauthorized channel activities and/or involve counterfeited and/or second-hand products," it said in a statement.

North Korean embassy officials and other elites are well-known conduits of luxury goods into the capital. There is also evidence that foreign traders are in on the act.

One store sells outlet converters so that shoppers who live in North Korea can use their foreign goods at home. Image from NK Pro/NK News.

But why does the regime go to all the trouble of getting luxury goods to Pyongyang?

Kim's personal 'slush fund'

"They earn a lot of dollars and cash from these luxurious department stores by selling all these goods and they re-allocate these dollars into their priorities like the nuclear and missile program," he said. "Luxury goods sales help them build more missile and nuclear material."

In recent months, the region has been put on edge with a seemingly unstoppable march by the North Korean regime to develop an intercontinental ballistic missile capable of hitting the continental United States.

Video from North Korean state media purports to show the launching of an intercontinental ballistic missile.

Developing missiles is expensive work.

Kim Kwang Jin says the luxury stores are part of the secretive Office 39 -- a group the US government describes as a slush fund for the regime.

"They control the department stores and all the best hotels and service industry in Pyongyang," he said, adding that tourist dollars get funneled straight to Office 39.

"All the best businesses," he says.

It is unclear how much money the luxury stores actually make for Office 39, but when you add tourism, the gold business, electronics and a whole range of other businesses the office manages, says Kim Kwang Jin, it all adds up.

He says Office 39 has grown substantially in recent years, now raking in hundreds of millions of dollars in revenue, despite tightening sanctions, and that countries need to do more to stop its operations.

The US Treasury Department says Office 39 manages a sprawling and convoluted series of front companies, financial institutions and moneymaking schemes to help fund the regime.

Started in the 1970s during the reign of Kim Il Sung, the current supreme leader's grandfather, it is probably better to think of Office 39 as a family business, not a government operation.

"It is the Kim family business. It does not belong to the cabinet; it does not belong to the state control," says Kim, who defected more than 10 years ago but continues to closely track North Korea as part of a South Korean government-linked think tank.

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Follow the money

The administration of US President Donald Trump has vowed to go after that money as part of its grand strategy to combat the threat posed by North Korea.

"Global action is required to stop a global threat," US Secretary of State Rex Tillerson said earlier this month. "Any country that hosts North Korean guest workers, provides any economic or military benefits, or fails to fully implement UN Security Council resolutions is aiding and abetting a dangerous regime."

Tillerson's statement came following allegations that the Chinese Bank of Dandong was acting as a pipeline to support purported illicit North Korean financial activity.

"We will cut the money off to North Korea until they behave properly," said US Treasury Secretary Steven Mnuchin.

The Singapore connection?

The NK Pro report makes a connection to Singapore-based traders bringing in a substantial amount of goods into North Korea department stores, including allegedly bringing in luxury items banned by UN sanctions.

China is often highlighted as the trading partner with the most leverage over North Korea. And China is certainly North Korea's largest trading partner and historically its closest ally. President Trump has repeatedly said China could help solve the North Korean crisis.

North Korea's licit 2015 imports

Source: Observatory of Economic Complexity

But other, less well-publicized trading ties exist. Companies in Singapore, Malaysia and Russia have all been highlighted by the UN panel of experts on North Korea and the US Treasury Department as the alleged origin or transit point of illicit goods.

In the face of growing criticism of this trade, the Singaporean government announced new regulations in 2010 -- substantially expanding the list of luxury goods banned for export to North Korea.

"Singapore takes its obligations under the United Nations Security Council Resolutions (UNSCRs) seriously, and is implementing them," a spokesman for the Ministry of Foreign Affairs told CNN.

They said they were unable to comment on specific companies and individuals.

Kim Kwang Jin was based in Singapore and says he did business with Singaporean-based companies in the early 2000s.

He says the island nation's huge shipping port and trading skills made it an ideal trading point for his work.

Of course, not all of the trade from Singapore to North Korea is illicit. But traders don't advertise their presence much.

"They want to make money with these secret deals with North Korea. North Koreans don't have many channels to the outside. So they use these hidden channels. And through that they can make a lot of money," Kim said.